Summary: Svenska Cellulosa Aktiebolaget SCA. Table Of Contents. Rationale Outlook Related Criteria And Research. May 28, 2012

Transcription

1 May 28, 2012 Summary: Svenska Cellulosa Aktiebolaget SCA Primary Credit Analyst: Gustav Liedgren, Stockholm (46) ; Secondary Contact: Dionisio Luiz, London (44) ; Table Of Contents Rationale Outlook Related Criteria And Research 1

2 Summary: Svenska Cellulosa Aktiebolaget SCA Credit Rating: BBB+/Stable/A-2 Rationale The ratings on Sweden-based global hygiene and paper products group Svenska Cellulosa Aktiebolaget SCA (SCA) reflect Standard & Poor's Rating Services' assessment, according to our criteria, of the group's business risk profile as "strong" and its financial risk profile as "intermediate". SCA's business risk profile is underpinned by the group's diverse earnings base, leading positions in core personal care and tissue markets, high level of vertical integration, and an overall competitive cost position. These strengths are moderated, in our view, by exposure to cyclicality in the paper business, a high degree of competition in key markets, and volatile input costs. The group's financial risk profile is supported by strong operating cash flow over the cycle, moderate financial policies, a strong liquidity position, and extensive forestland holdings. These strengths are partly offset by high investment levels and some exposure to currency fluctuations. On March 31, 2012, the group had adjusted debt amounting to about Swedish krona (SEK) 37.6 billion (about 4.1 billion). S&P base-case operating scenario In our base-case assessment, we anticipate that SCA will continue to benefit from the relatively stable characteristics of a large proportion of hygiene-related businesses. We further consider that the group's recent merger and acquisition (M&A) activity, the most significant being the acquisition of the European tissue operations of U.S.-based Georgia-Pacific LLC (A-/Stable/NR) and the divestment of its packaging operations to U.K.-based DS Smith Plc (not rated), will bring additional stability to the group's operational performance. The transactions, which are expected to close during the second quarter of 2012, have been carried out as part of the company's strategy to target growth in its hygiene business and lessen its exposure to the more cyclical and less-profitable packaging segment. If closed as planned, we view the transactions' effect on SCA's business risk profile as supportive. We base this primarily on SCA's strengthened market position in the European tissue sector (well above 30% on a pro forma basis) and, to an extent, the prospects for synergies. We also take into account that the group's operating performance is likely to be more stable and that its EBITDA margin is likely to increase from about 15% in recent years. S&P base-case cash flow and capital-structure scenario SCA's financial performance continues to be in line with what we consider commensurate with an "intermediate" financial risk profile under our criteria. At the current long-term rating level, we assume that SCA can maintain adjusted funds from operations (FFO) to debt of about 30%-35% on average. This ratio has consistently been in this range or slightly above in the last two years and for the 12 months ended March 31, 2012, it stood at 35.1%. Standard & Poors RatingsDirect on the Global Credit Portal May 28,

3 Summary: Svenska Cellulosa Aktiebolaget SCA In our base-case scenario, assuming that the proposed M&A transactions are finalized as planned, we believe that adjusted FFO to debt on a pro forma basis will remain around or slightly above 35% in the near term. This is based on our understanding that the finalized M&A transactions will be more or less cash neutral. Liquidity The short-term rating is 'A-2'. We view SCA's liquidity position as "strong" under our criteria, supported by large backup facilities, which balance SCA's substantial exposure to short-term financing. We estimate that the group's ratio of liquidity sources to uses over the next 24 months exceeds 1.5x. As of March 31, 2012, SCA's liquidity position was supported by: Cash and cash equivalents of about SEK4.3 billion. About SEK20.8 billion of unused long-term committed syndicated and bilateral credit facilities (SEK320 million expiring at the end of 2012 and SEK2.5 billion in April 2013). SCA's main long-term credit facilities consist of a 1 billion facility maturing in 2014 and a 1 billion facility maturing in The facilities carry no financial covenants or material adverse change clauses that would restrict SCA from drawing under them. Operating cash flow generation, which we expect to continue to exceed working-capital and capital-expenditure needs over the short term. Furthermore, we assume that SCA has a degree of flexibility in terms of capital spending, if necessary, to offset any potential liquidity pressure. These liquidity sources compared with reported short-term debt of about SEK8.6 billion, of which SEK4.7 billion consisted of outstanding commercial paper maturing within 12 months. Outlook The stable outlook reflects our expectation that the transactions will be closed as planned and that consolidation of the additional tissue operations will support SCA's credit metrics. We expect, for example, that the group can maintain a ratio of FFO to debt of 30%-35% over the cycle. It also reflects our belief that the group's medium-term operating performance will benefit from the relatively stable characteristics of a large proportion of hygiene-related businesses. The long-term rating could come under pressure within the next six-12 months if adjusted FFO were to deteriorate further than slightly below 30%, or if we were to assess that it could remain below our guidance levels for a lengthy period. We would, for example, not consider FFO to debt falling significantly below 30% on a pro forma basis to be commensurate with the current long-term rating level. Such a scenario could, for example, be the result of a sharp increase in outgo, such as spending on further acquisitions, dividends, or capital expenditures. We could take a positive rating action or revise the outlook to positive if we thought it likely that the group could retain a ratio of FFO to debt of about 35%-40% on a sustainable basis over the medium term, given our assessment of the group's existing business risk profile. Rating upside could also materialize if we were to consider that the business risk profile had strengthened over time. 3

4 Summary: Svenska Cellulosa Aktiebolaget SCA Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Research Update: SCA 'BBB+/A-2' Rtgs Affirmed On Planned Acquisition Of Georgia-Pacific European Tissue Operations; Outlook Stable, Nov. 11, Corporate Criteria: Analytical Methodology, April 15, Corporate Criteria: Ratios And Adjustments, April 15, 2008 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Key Credit Factors: Criteria For Rating The Forest Products Industry, Dec. 11, 2009 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Additional Contact: Industrial Ratings Europe; Standard & Poors RatingsDirect on the Global Credit Portal May 28,

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